THE board of HBOS will meet tomorrow to decide whether to approve a multi-billion-pound rights issue to repair the bank’s balance sheet.

Lord Stevenson of Coddenham, chairman of the group that includes Halifax, Bank of Scotland, Clerical Medical and Birmingham Midshires, has called the discussions ahead of the bank’s annual shareholder meeting on Tuesday in Glasgow.

The board is being asked to consider raising between £2 billion and £4 billion from investors. It is still possible that the group, which has a market value of £18 billion, could attempt to ride out the credit crisis without raising additional funds.

HBOS has had one of the strongest capital ratios – a measure of a bank’s strength – in the sector. It is still stronger than Royal Bank of Scotland and Barclays, but its ratio remains much below its long-term average.

Andy Hornby, the HBOS chief executive, has also been down-beat about the immediate prospects of the UK economy.

As a result he may want to raise capital to have headroom should the outlook deteriorate. The move follows Royal Bank of Scotland’s £12 billion rights issue announced last week. One analyst said: “RBS was forced to raise money after a mistimed acquisition. With HBOS it’s more about what Hornby thinks about the economy.”

At the annual meeting Hornby is expected to admit the bank has taken a further writedown of up to £3 billion on assets whose value have been eroded by the credit crunch.

Analysts said the priority for HBOS was to stay competitive in the UK and take advantage of a market where margins on finance products have improved.

If he is to avoid an investor backlash, Hornby will have to convince investors about why he needs capital. He must also provide clarification on the group’s future dividend policy. The shares are currently yielding 9%.

The fall-out at RBS after its cash call showed how shareholders could turn on board executives if they felt a company had been poorly run. RBS investors want a board clear-out with pressure mounting on the chairman, Sir Tom McKillop.

It is likely to result in a changing of the guard at RBS. Three nonexecutives – Bob Scott, the senior non executive, Bud Koch, former chief executive of RBS’s Charter One business in America, and Peter Sutherland, chairman of BP – are all due for reelection at next year’s annual meeting. All three will have served nine years, pushing them to the limits of the Higgs guidelines on director independence.

The company is looking for three new nonexecs, including a senior director, who will be groomed to succeed McKillop.

Shareholders are focusing their anger on McKillop rather than Sir Fred Goodwin, the bank’s chief executive.

One top 10 shareholder said: “We are not fans. He’s shown throughout his time at the company he does not have the banking experience you need for a job like that. The whole of the board needs to be cleared out and freshened up.”

Colin McLean at SVM Asset Management said: “McKillop is the main focus for investors. If you want to drive a review of strategy you have to start with the chairman.”

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